Remember June of 2020? The world was crazy, all your employees were working from home, and you were figuring out how to have meetings on Zoom and Teams?
On 6/16/2020, a legal opinion came out from the NCUA. You can find that link at the bottom of this post. In this opinion, the Acting General Counsel for NCUA stated the following:
“However, we believe that the subject scenario you articulate could comply with the purpose of § 1761c(b) of the FCU Act to prevent fraud and errors in the loan processing context by separating the loan approval and disbursement functions if certain safeguards were in place to assure that the MSR is not functioning as a “loan officer.””
The heart of this matter is the segregation of duties between the input of a loan application and the disbursal of funds.
As ALUS continue to evolve; fewer of your loans as a percentage are being judgmentally reviewed by an underwriter (human). Loans are “auto approved” and the same person that inputs the loan is also disbursing the funds. This trend will continue to the point that humans may not be involved in the decision process at all in the future.
Now, as a practice, many credit unions operate under this scenario and have for quite some time without getting the blessing of the NCUA attorneys. You will also notice that in this opinion, the attorney uses “weasel words” like “may or could” throughout the opinion. Fair enough, they wouldn’t want to give carte blanche to credit unions to ignore safeguards and common sense etc.
If you have worked with us in the past, you know that we are proponents of centralized processing/disbursal of funds for loans. There are several reasons that we emphasize this model:
- “Sanity Check” – ALUS systems are only as good as they are programmed. Most of the systems today are based on Boolean logic and are heavily weighted on user input. Some of these systems, without safeguards, can be defeated by inputting the incorrect income. I saw a loan last week for a 25-year-old electrician that was automatically approved with income of $55,000 per month, and denied at the correct income of $55,000 per annum.
- Incentive Pay- Even if you are not paying the originator for loan volume and only paying for ancillary sales. If those that are responsible for selling the loan to the software and the borrower are cutting the checks, you are putting that employee in “moral hazard”. I would never setup an employee in a situation where someone from the outside would question their motive or integrity.
- Expertise – We still need to perfect liens and as much as I would like to automate the DMV in your state, if we are gathering paperwork to perfect a lien, I would rather have those employees that understand that process thoroughly doing that important work and leave my frontline lenders freed up to sell loans.
- Validation of Income Documents – If the ALUS stipulates the loan for income verification, if the same person that is entering/booking the loan is verifying the income documents, this creates a conflict in our opinion. Not to mention the amount of fraudulent income docs that are floating around (paycheckstubs.com). If the person that is inputting the loan into the system is clearing an underwriting stipulation, that is perilously close to a credit decision…. Not to mention how often we see this done incorrectly in our practice.
I am not trying to throw sand in the gears of your loan operation. In fact, most of our clients see an increase in productivity/efficiency by centralizing much of their loan operation!
We recommend taking a risk-based approach when building out the loan flow at your organization. There are a lot of circumstances where two humans aren’t appropriate to be involved in the loan process, however, there are circumstances where that second set of eyes/skills are extremely important. Balancing the members’ expectation for the speed to decision and the organization’s speed to funding is where the best credit unions will win in the near future.
Automation can and will replace some of these safeguards. Until that time comes, we need to be setup to deliver loans competitively in this market with appropriate controls.
Reach out, we would love to talk to you about your loan flow at your credit union.
Don Arkell
Owner
CU Lending Advice
don@culendingadvice.com
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